John Charcol mortgage expert Ray Boulger has written up his thoughts on the Treasury Select Committee’s brief on the housing market, Mortgage Arrears and Access to Mortgage Finance.
He makes some very lucid, if disconcerting observations. First, Boulger says the report focuses far too much on first time buyers, the subprime sector and remortgaging. In that way, he notes, it fails to acknowledge the fact that problems go well beyond these sectors.
Key among these under-acknowledged woes are the people literally “stuck” in the market as it stands; not quite in negative equity or running up arrears, but with equity severely enough eroded to prevent any possible relocation. And while this immobility doesn’t ring the same alarm bells as defaults do, there are still some very important macroeconomic consequences, says Boulger. As he explains (our emphasis):
When most people move they rely on the equity in their property to provide the bulk of the deposit required for their new property, currently a minimum of 10% in most cases, plus moving costs, of which stamp duty land tax is often the biggest. With around 2m households either in negative equity or with equity of less than 10% (recent CML estimate) plus my estimate of another ½m with equity only between 10% and 15% there are about 2½m such households who can’t move (unless they sell up and rent). This is not only a serious problem for the households concerned but a lack of mobility for a substantial number of homeowners also has important macro economic consequences.
Boulger does observe that rising house prices could help alleviate problems for this particular group, but that’s not necessarily the case for another sector caught immobile in the current market — holders of self-certified mortgages. As Boulger explains:
Another group of borrowers not mentioned in the report are those with a self certification mortgage. Like sub prime mortgages this category of mortgage has almost disappeared and this means that most of the ½m households I estimate have a self cert mortgage will also find it very difficult to move. Add to this the ½m households I estimate to have a sub prime mortgage and this means a total of 3½m households out of approximately 10m with a residential mortgage will currently find it very difficult or impossible to move.
Meanwhile, anyone hoping to acquire a competitive mortgage offer by shopping around, even on a low LTV-basis, might be struck down by another more devious process doing the banking rounds — a new tendency among lenders to insist on footprinted credit checks. As Boulger explains:
One FSA rule the majority of lenders, albeit with some honourable exceptions, have been riding roughshod over ever since the FSA started regulating mortgages in October 2004 is the requirement not to do anything to inhibit consumers shopping around. Despite some lenders consistently breaking this rule and hence being a serious impediment to access to mortgage finance for some consumers the Committee appears not to be aware of this problem as there is no reference to it in their report.
I am referring to the fact that the only way to be reasonably confident not only whether a lender will lend but how much they will lend is to submit a DIP (Decision n Principle) and the lender quite rightly then normally undertakes a credit check. However, instead of doing a quotation search, which does not leave a footprint on the credit file, most lenders do a full search and hence leave a footprint. Both searches give the lender the same information but one inhibits the consumer’s ability to shop around because their credit score is negatively impacted by too many searches. Now I wonder why lenders would want to inhibit potential customers shopping around?
He goes on:
Avoiding contravening this FSA rule is dead simple – all a lender has to do is refrain from recording a full search unless and until they receive a full mortgage application. That is the only time anything other than a quotation search should be recorded. If lenders complain it needs some IT changes that cuts no ice — they have had over 4¾ years to make any necessary IT changes. I wonder if the FSA even knows which lenders use a quotation search and which don’t. If they don’t their starting point should be to find out. The committee should have asked the FSA when they intend to start enforcing this rule.
If what Boulger writes is true, even if house prices do begin to rise steadily again a lack of “liquidity” may still prohibit any significant turnover from being achieved. This means the prices noted in surveys will increasingly become the reflection of an illiquid market, and in that sense not a wholly reliable indicator of the market as a whole.
Certainly, FT Alphaville’s own experience of the London market and estate agents we talked to shows that while prices seem relatively supported, supply of new properties is more dismal than ever.
Related links:
What the Treasury Select Committee missed in its report – FT Alphaville
UK lenders increasing mortgage rates – FT Alphaville